Vanguard coming to Canada – Cheaper ETFs And Index Funds

by Mike Holman

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American Index Fund and ETF giant Vanguard has announced they are setting up shop in Canada.  The company indicated last fall that they were planning this move, but today was the first official announcement. They aren’t releasing any investment product information, but it’s reasonable to think that eventually they will offer both exchange trade funds (ETFs) and index funds, similar to their American product lineup.

Their press release indicates they will offer investment products to Canadian investors through investment advisors.  I was a bit surprised at this because most mutual funds that are sold through advisors in Canada have a hefty annual trailer commissions – usually about 1%. 

Vanguard is well known in the U.S. for their cheap investment products.  Adding a trailer commission which is competitive to what other mutual fund companies offer will completely negate their low fees.

[edit - It appears that Vanguard will not be paying any commissions and will be working with fee-based advisors along with offering securities to the general public.]

Most Canadians invest through their bank or a financial advisor.  All the investment choices offered are managed funds which have annual commissions payable to the advisor of up to 1%.  If you want to use a financial advisor, you have to pay them.  Trailer fee commissions, DSC fees, upfront load fees are how the financial advisory industry charges it’s customers via the mutual fund distributors.

Basically fund companies buy “shelf space” from advisors via the trailer commissions and upfront commissions.

There are two segments of the Canadian financial advisory community which would be interested in Vanguard products.  Wealth management services typically will manage a portfolio and charge a percentage of assets (ie 1% per year).  They will often use F-class investment products or ETFs which pay no trailer commission and therefore won’t be losing any income by using Vanguard products. 

The other type of investment advisor is “fee-based” which means they charge a set fee for their services.  This type of advisor doesn’t make any money from commissions and will also be able to recommend Vanguard without any loss in income. 

See How financial advisors get paid and Different types of financial advisors for more information.

This will be a good move for Canadian do-it-yourself investors who wish to have passive index investment products in their portfolio.  I’ve been a couch potato investor for almost five years and if they can offer the same kind of products and fees in Canada as they do in the US, I might consider switching to them.

If Vanguard offers Canadian dollar versions of their popular US$ ETFs, that will save on currency conversion charges which are quite high for most Canadian discount brokerage – see a complete list of currency conversion charges at this Canadian discount brokerage comparison.

What should Canadians expect from Vanguard?

More consistent low costs for Canadian investment products.  For example, iShares S&P/TSX 60 Index Fund (XIU) has a very low annual fee of 0.17%, but iShares S&P/TSX Capped REIT Index Fund (XRE) has an outrageous 0.55% annual fee.  Expect Vanguard to offer cheap products in every sector.

Unhedged Canadian dollar versions of international indexes.  Most of the Canadian iShares international ETFs are currency hedged.  Vanguard only offers unhedged foreign ETFs for their American clients, so look for the same in Canada.

Good selection of low cost index funds with some service.  91% of Vanguard’s American assets are in index funds which are a lot more accessible for most investors compared to ETFs.  Transacting index funds is far simpler than buying and selling ETFs and trades can be automated.

There are a number of reasonable index fund choices in Canada, but the cheapest ones (TD e-funds) are a pain to set up and other options (bank index funds, Streetwisefunds) are not that cheap.  Look for Vanguard to set competitively priced index funds with more variety of choices and better service.

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{ 4 comments… read them below or add one }

1 Dillon

This is excellent news for Canadian investors.

2 Todd

I’m not sure I understand how a 1% trailer is much different that a 1% fee for service charge (with the exception of non-reg accts where you can write off the charge).

3 Adam

Hello Mike,

I’m looking to invest in low-MER no-load index funds since quite a while, but as you must know, it’s quite hard to find in Canada (if we compare with the MERs in the United States)

After looking at the Vanguard canadian site (https://www.vanguardcanada.ca/individual/portal.htm), it seems that they only offer ETFs… Is this normal or am I simply looking at the wrong place?

Thanks!

4 Mike Holman

Hi Adam. That is correct.

I would look into the TD e-series index mutual funds. Best deal in town.

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